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An Immediate Necessity

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Deepto Roy

This post was published by mylaw.net on May 9, 2011- http://mylaw.net/Article/An_immediate_necessity/

Coal Minister Saiprakash Jaiswal has in a recent statement at the Energise India Forum organised by theEconomic Times, emphasised the necessity of immediate and wide-ranging reform of the coal sector. The two most significant suggestions advocated by him are to privatise commercial mining of coal, and to appoint an independent regulator for the mining of coal.

Coal remains, despite its immense importance in literally fuelling industrial growth, a much-neglected sector as far as reforms are concerned. A proposed amendment to the Coal Mines Nationalisation Act, 1973 (allowing the private mining of coal), has been pending before Parliament for more than a decade.

Contrast the progress made in the coal sector with the power sector (which in India is intimately linked to the coal sector), which has benefited immensely from privatisation and competition. However, the challenges in the coal sector are now threatening to derail the progress made in the power sector (and wider industry) altogether. Unless reforms are undertaken immediately, the coal issue may soon be faced with a crisis.

The coal crisis

Coal is the primary source of energy in India. It meets about two-thirds of the country’s energy requirements. This is actually peculiar when compared to the rest of the world, where the dependence is mostly on gas. The power sector itself consumes more than fifty per cent of the coal produced in India. Given the shortage in natural gas, most projects that are under development are also coal projects.

A huge demand-supply gap is emerging. Coal India Limited (“CIL”), the public sector behemoth which controls around ninety per cent of the coal being produced in India, extracted 452 million tonnes (MT) of coal (against demand which was much higher) in 2010-2011. For 2011-2012, CIL has in fact lowered its production target from 461.5 MT to 454 MT due to forest clearance related issues. The shortage for the year 2012 is expected to be 142 MT (554 MT against 696 MT of demand) and may go up to 200 MT by 2017 (the last year of the Twelfth Five Year Plan). 800 MT will be produced as opposed to a demand of 1000 MT.

The coal shortage is likely to hold up power projects of 17000 MW aggregate capacity and prevent plants which have been set up in 2009 to 2010 with total generation capacity of 5593 MW from operating above forty-two per cent capacity. The situation is so bad that the Government has requested power producers to ensure that all future plants should be built in such a manner that they are capable of using imported coal.

Coal mining has also been affected by the diktat of the Ministry of Environment and Forests in relation to mining in the “no-go” zones, but that is the subject matter of another post.

Many believe that the problem is not been of availability, but rather that CIL and its subsidiaries have not been able to meet the extraction targets. Privatisation may be the answer to this problem.

Present legal regime on coal

From the fifties to the seventies, India privatised all its coalmines. Nationalisation was then justified on the basis that given the importance of coal as a natural resource, the necessity was for a systematic and sustainable exploitation of the resource, and private industry was likely to deplete coal resources.Additional reasons included the requirement of significant investment in this sector – and it was believed that the private sector could not make, the improvement of the working conditions in the coalmines, and the protection of the welfare of the workers.

In the present legal regime, only government companies can mine coal. Private companies in the power, cement, and steel sectors can also mine coal on a captive basis, that is, the company, which was setting up the industry, can mine the coal and use it at the plant. Any surplus necessarily needs to be handed over to CIL for disposition. Recent amendments to the coal dispensation policy means that captive mining can be carried out by an affiliate or subsidiary of the company developing the plant.

A power plant that is being set up in India can get domestic coal in one of two ways. It may be through a linkage from a mine owned by CIL, which means that CIL shall supply the coal from that mine to the power plant. Alternately, the power plant can apply for a captive mine.

The allocation of captive mines was usually through an empowered committee of the Central Government (there is a proposal now to allot these mines through a competitive bidding, which will increase transparency in the process). A linkage or mine once allotted, cannot be transferred without the consent of the Central Government.

Imported coal

To ensure that there is sufficient supply to the massive coal-fired power plants being set up in the country, a large number of Indian companies have been scouting the globe for coal resources. Indian companies have purchased large mines in Indonesia, Australia, and Africa.

Imported coal is almost twice as expensive as Indian coal. This significantly raises the cost of generation of electricity using such coal, and is in turn passed on to the consumer. The Indian buyers are also left at the mercy of fluctuations of coal prices in the international market, as well as foreign exchange fluctuations. This becomes particularly difficult for competitive bid projects or projects that have been negotiated as single tariff (as opposed to a two-part tariff of fixed costs and fuel costs), since they are unable to pass on the increased cost of fuel to the power purchasers.

The Central Electricity Authority (“the CEA”), which is the policy making body under the Electricity Act, 2003 and the Planning Commission had made a proposal in terms of which CIL would be the nodal agency for the import of coal into India and shall thereafter pool domestic coal along with imported coal for sale within India. This will significantly reduce the cost of imported coal.

Breaking the monopoly

This extremely restrictive regime has handicapped the growth of the sector. Captive mines and linkages are often allotted to companies with little or no experience in mining. These companies then peddle the allotment to the highest bidder. Private companies have to resort to structures and documents (the legal enforceability of which are doubtful) to enter the mining sector. Illegal mining is also rampant, and safety standards are deplorable at these mines. The coal mafia steals and pilfers with impunity.

The coal industry today has conditions that actually run counter to the objectives of nationalisation, that is, the sustainable development of the mining industry, and the protection of the welfare of mine workers.

Given the virtual monopoly of public sector companies, private developers have little or no ability to negotiate the terms of fuel supply agreements. As a result, most agreements do not offer basic protections such as guaranteed supply and the provision of liquidated damages for failure to supply by the suppliers. The introduction of competition will ensure that the developer has choices in terms of who to purchase the coal from, and will also allow them to contractually protect themselves from risks, which should generally be borne by the suppliers.

An independent regulator in the coal sector, which shall review and determine prices and settle disputes between parties (similar to the regulators in the electricity sector), will help protect the consumer as well as developer interest, and should be charged with the obligation to develop a competitive market for coal.

At the same time, elaborate (and pragmatic) measures would have to be put in place to ensure the safety of the mines and the workers and improve working conditions, since the social cost for labour exploitation can be immense.

Privatisation of mining today is not just desirable, it is absolutely necessary.


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1 Comment

  1. Sudipta Bhattacharjee says:

    Nice one Deepto. Just wanted to add on to your point about higher costs of imported coal – the costs have gone up even further on imported coal owing to the recent levy (post budget 2011) of 5% of CVD (additional customs duty in lieu of excise duty) on import of coal. While this additional cost may be recouped by power generators through the ‘impact of change in law clause’ under the PPA(s), this move is perplexing given the inflationary impact this would have on cost of power procurement and the Government’s avowed objective of “affordable power to all”

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